COMPANY LAW (INCORPORATION)

1. Saturday 4th August 2012 COMPANY LAW(INCORPORATION) Lecturer: RowinGurusami

2. The kind of legal entity or corporate body which is brought into being by the registration procedures laid down by the Companies Act 2006 Company law is about interactions between a company, the company’s members (shareholders), its directors, and its creditors (secured & unsecured) A company is a legal person COMPANY LAW Lecturer: Rowin Gurusami

3. Legal mechanism through which the law allows a group of natural persons to act as if they were a single composite individual for certain purposes That single composite individual has a separate legal personality other than that of its members This legal fiction means the law allows those ‘entities’ to act as persons for certain limited purposes IMPORTANT – Salomon v. Salomon & Co Ltd (1897) LEGAL PERSON Lecturer: Rowin Gurusami

4. SALOMON v. Salomon & Co LTd (1897) Lecturer: Rowin Gurusami

5. Price of business = £ 39,000 Payment was £ 20,000 in shares, £ 10,000 debentures and £ 9,000 cash Mr. Salomon held 20,001 shares, his family held the remaining 6 shares Debentures later transferred to Mr.Broderip Business went into insolvent liquidation Assets not enough to pay off debentures Mr.Broderip brought claim alleging that company was but a sham and a mere ‘alias’ of Mr. Salomon FACTS Lecturer: Rowin Gurusami

6. In Broderip v Salomon [1895], the CoA held upheld Broderip’s claim CoA looked at motives of promoters (Salomon) and members (Salomon and family) Held that six members never intended to take part in business Mr. Salomon was held to be liable to indemnify company against its trading debts debts CoA was disturbed that an individual could avoid responsibility for one’s debts The concept of the “one-person company” BRODERIP v. SALOMON [1895] Lecturer: Rowin Gurusami

7. Mr Salomon appealed to the House of Lords HoL unanimously reversed the CoA’s decision Held that company was valid formed according to Joint Stock Companies Act 1844 (requiring 7 members) Motives of shareholders irrelevant (unless fraud involved) Salomon was the agent of the company (not vice versa) Company acquired legal personality although nothing changed (business, managers, who benefits) SALOMON v. SALOMON & CO LTD Lecturer: Rowin Gurusami

8. Fact that shareholders only holding shares as technicality is irrelevant This facilitated investment in large companies by shareholders for pure speculative purposes ANY company formed in compliance with regulations of Companies Act is a separate person Use of debentures instead of shares provide further protection to investors One of the rare principle that HoL cannot overrule WHY IS THIS CASE IMPORTANT? Lecturer: Rowin Gurusami

9. Macaura v Northern Assurance Co [1925]– Property of company belongs to it and not to its members Lee v Lee’s Air Farming Ltd [1961] – Privy Council held that a company may make a valid and effective contract with one of its members. Thus possible for one person to be at same time wholly in control of company and an employee of that company The rule in Foss v Harbottle (1843): Only the company can sue for wrong caused to it. OTHER RELEVANT CASES Lecturer: Rowin Gurusami

10. Enacted by the Limited Liability Act 1855 Concept whereby a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability A shareholder in a limited company is not personally liable for any of the debts of the company, other than for the value of his investment in that company LIMITED LIABILITY Lecturer: Rowin Gurusami

11. Situations where the judiciary or legislature has decided that separation of personality of company and the members is not to be maintained Possibility to look behind the company-framework (separate personality) to make members liable Doctrine of Salomon v Salomon & Co. Ltd still unshakeable LIFTING THE VEIL OF INCORPORATION Lecturer: Rowin Gurusami

12. s213 of Insolvency Act 1986 states that any person involved in fraudulent trading can be made liable for resulting losses This provision requires “actual dishonesty...real moral blame” to be proved and this was difficult s214 of IA 1986 deals with directors and ‘wrongful’ trading, where it is negligence rather than fraud that matters Mainly in cases where director trades when not reasonable anymore to do so (Re Produce Marketing Consortium Ltd (No 2)(1989)) STATUTORY EXAMPLES Lecturer: Rowin Gurusami

13. Companies Act 2006 s399 – companies to produce group account CA 2006 s409 – parent to provide details of subsidiaries’ names and details CA 2006 s767 – directors personally liable for loss/damage suffered by 3rd party if public company trades without first obtaining trade certificate STATUTORY EXAMPLES Lecturer: Rowin Gurusami

14. Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] – To determine whether company to be characterised as ‘enemy’ in time of war Re Darby, ex p Brougham [1911] – If company used as means to perpetrate fraud Gilford Motor Co Ltd v Horne [1933] & Jones v Lipman [1962]– To prevent deliberate evasion of contractual obligation VEIL LIFTING BY COURTS Lecturer: Rowin Gurusami

15. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] – To allow group of associated companies to be treated as one Lord Denning outlined the concept of the ‘single economic unit’, wherein the court examined the overall business operation as an economic unit Adams v Cape Industries plc [1990] showed the reluctance of the courts to extend the rule in DHN where there was no motive to commit fraud and where subsidiaries are run independently free from day to day control of parent VEIL LIFTING BY COURTS Lecturer: Rowin Gurusami

16. Public Company – intention to raise large amounts of money from general public Private Company – investment largely provided by founding members (personal savings or loans) Unlimited liability company – only private Liability Limited by shares – members’ liability limited to amount paid for shares Liability Limited by guarantee – members’ liability is amount which each member undertakes to contribute in winding up. Mainly used for non-commercial activities (e.g. charities) TYPES OF COMPANY Lecturer: Rowin Gurusami

17. Capital Public: Minimum £ 50,000 Private: No minimum Only public company can raise capital by offering shares/debentures to public Only public company can be listed on Stock Exchange Public company must wait for trading certificate from Registrar PUBLIC v. PRIVATE COMPANIES Lecturer: Rowin Gurusami

18. Accounts Public: 6 months from end of accounting period to produce statutory audited accounts Private: 9 months Listed public company must have full accounts and reports on website Public co. must present accounts/reports at AGM Private companies not required to hold AGM. Public companies must hold one within 6 months of end of financial year PUBLIC v. PRIVATE COMPANIES Lecturer: Rowin Gurusami

19. Person who takes the necessary steps to form a company Whaley Bridge Calico Printing Co v Green (1879): “the term promoter is a term not of law, but of business, usefully summing up in a single word a number of business operations ... by which a company is generally brought into existence.” No definition of promoter by CA 2006 THE PROMOTER Lecturer: Rowin Gurusami

20. Courts have framed tests to determine whether a person’s activities relate to promotion of a company Twycross v Grant (1877): “promoter is one who undertakes to form a company with reference to a given project, and to set it going and who takes the necessary steps to accomplish that purpose” Definition left as general as possible as anti-avoidance measure THE PROMOTER Lecturer: Rowin Gurusami

21. Registering the company with Companies House Entering into pre-incorporation contracts In the case of public companies, issuing a prospectus Appointing directors and finding shareholders wishing to invest in the new company ROLE OF THE PROMOTER Lecturer: Rowin Gurusami

22. Promoter is NOT an agent of the company he is promoting (Kelner v Baxter (1866)) Promoter is a fiduciary (i.e. owing certain obligations to the principal) Fiduciary must act to secure the principal’s best interest and must not allow his own interests to govern his behaviour in any way that could conflict with the principal’s best interests DUTIES OF PROMOTER Lecturer: Rowin Gurusami

23. Promoter must not make secret profit from his position Must disclose any interest in property sold to company and make full disclosure of any profit (Re Lady Forrest (Murchison) Gold Mine Ltd (1901)) Promoters required to make full disclosure of any such profit to an independent board of directors once company comes into existence (Erlanger v New Sombrero Phosphate Co). Failure to do so can lead to rescission of the contract DUTIES OF PROMOTER Lecturer: Rowin Gurusami

24. Company only comes into existence once incorporated Any contract made by promoter on behalf of unincorporated body will make the promoter liable (Kelner v Baxter (1866)) Even through the contract was ratified in Kelner, the Court rejected the approach that a stranger could, through ratification, relieve an agent of responsibility PRE-INCORPORATION CONTRACTS Lecturer: Rowin Gurusami

25. s51 CA 2006 states that promoters contracting on behalf of a putative company will be held personally liable unless clearly and expressed stated to the contrary (Phonogram Ltd v Lane (1981)) Contracts (Rights of Third Parties) Act 1999 DOES NOT protect the promoter from liability Novation removes the promoter’s liability PRE-INCORPORATION CONTRACTS Lecturer: Rowin Gurusami

26. Memorandum of Association Articles of Association Application form (detailing name of company, form of limited liability, public or private, registered office) Statement of capital and initial shareholdings (no. Of shares, aggregate nominal value, how much paid up) Statement of proposed officers (directors, company secretary) Statement of compliance Registration fee (£20 or £50 if same day incorpor.) REGISTRATION Lecturer: Rowin Gurusami

27. Lecturer: Rowin Gurusami

28. For Public Companies only Conclusive evidence that company is entitled to do business and exercise any borrowing powers Requires: Nominal capital at least £ 50,000 At least quarter of nominal value paid up Amount of preliminary expenses paid for Any benefits given or to be given to promoters TRADING CERTIFICATE Lecturer: Rowin Gurusami

29. All private companies must end with ‘Ltd’ and all public companies must end with ‘plc’ Cannot be a name already registered Must not use illegal or offensive words Requires Secretary of State’s consent if using words suggesting connection with government Must avoid tort of passing off NAME OF COMPANY Lecturer: Rowin Gurusami

30. If name suggests that company is carrying on the business of complainant or is otherwise connected with it. Company can be prevented by an injunction issued by court in passing-off action from using its registered name, if its goods are confused with those of the claimant. Objection has to be made to Company Names Adjudicator under the Companies Act 2006. Adjudicator will review the case. Within 90 days make their decision and provide reasons May require offending company to change its name May even determine the new name Appeal against decision may be made in court PASSING-off Lecturer: RowinGurusami

31. Simple document which states that subscribers wish to form a company and become members of it Not so important since advent of CA 2006 because much of information in MoA is now found in AoA (objects not even required to be mentioned) Object of a company is now considered as completely unrestricted under CA 2006 MEMORANDUM OF ASSOCIATION Lecturer: Rowin Gurusami

32. Under Companies Act 2006, company’s objects are completely unrestricted (as long as lawful). The company can restrict its activities by including restrictions in its articles. If directors permit an act which is restricted by company’s objects, then the act is ultra vires. Ultra vires: where a company exceeds its objects and acts outside its capacity. OBJECTS & CAPACITY Lecturer: Rowin Gurusami

33. Articles of Association sets the internal constitution of company; i.e. internal management and running of company Deals with issues like directors (appointment, termination, powers, remuneration), documents and records, members’ rights, general meetings, shares (issue and transfer), dividends and so on... Secretary of State prescribes Model Articles which can be adopted in full or in part Model Articles deemed accepted if none filed ARTICLES OF ASSOCIATION Lecturer: Rowin Gurusami

34. Through special resolution (75% majority) Copies must be sent to Registrar within 15 days Any change must only be bona fide in interests of the company as a whole (Allen v Gold Reefs of Africa (1900)) Members decide if change bona fide Court will only interfere if no reasonable person believe change to be bona fide If change bona fide, irrelevant whether it is harsh Void if fraud takes places ALTERATION OF ARTICLES Lecturer: Rowin Gurusami

35. AoA constitute a contract between: Company and members Members and company Members and members Company’s constitution does not bind company to third parties s33 gives to constitution the effect of a contract made between the company and its members individually and impose contract on members dealing with each other(Rayfield v Hands (1958)) THE CONSTITUTION Lecturer: Rowin Gurusami

36. Constitution is not binding upon an outsider (Eley v Positive Government Security Life Assurance Co (1876)) The constitution does not bind members in any other capacity (Beattie v EF Beattie (1938)) Constitution can be used to establish terms of contract existing elsewhere (Re New British Iron Co, ex parte Beckwith (1898)) THE CONSTITUTION Lecturer: Rowin Gurusami

37. Greater public accountability via Companies Registry, registers, London Gazette and company letterheads Registrar keeps a file at Companies House holding all documents delivered by the company for filing. Any member of public can inspect them Registers held at registered office of company STATUTORY BOOKS & RECORDS Lecturer: Rowin Gurusami

38. Register of Members: name, address, shareholder class, no. of shares, date membership started Inspection free for other members, payable for public Register of Charges: details of fixed or floating charges, brief descriptions of property charged, amount of charge, name of creditor Any person can inspect (members and creditors for free REGISTERS Lecturer: Rowin Gurusami

39. Register of Directors: present and former forenames and surnames, service address, residency and nationality, business occupation & date of birth Must keep separate register of residential address Register of Debentureholders: No statutory obligation Record of Directors’ service contracts: Copies available to members for viewing REGISTERS Lecturer: Rowin Gurusami

40. Sufficient accounting records to explain company’s transactions and its financial position (i.e. Profit and loss account and balance sheet) Daily entries of sums paid & received Record of assets & liabilities Statements of stock at end of financial year Statements of stocktaking Statements of goods bought and sold Records to be kept for 3 years (private) & 6 years (public) Shareholder do not have statutory right to inspect records, but it may be granted by articles ACCOUNTING RECORDS Lecturer: Rowin Gurusami

41. Must prepare annual accounts showing true and fair view, lay them and various reports before members and file them with Registrar’s (following directors’ approval) Must show true and fair view of assets, liabilities, financial position, profit and loss Accounts must be audited; the reports, together with directors’ report, supplied to members Failure to comply result in fines ANNUAL ACCOUNTS Lecturer: Rowin Gurusami

42. Every company must make an annual return to Registrar address of registered office Address of where register of members held Type of company and principal business activities Total no. of issued shares, nominal value Rights of shares Particulars of members Particulars of those who ceased to be members Particulars of directors and company secretary ANNUAL RETURN Lecturer: Rowin Gurusami

43. Senior position in a private or public company, normally in the form of a managerial position or above Ensures that an organisation complies with relevant legislation and regulation, and keeps board members informed of their legal responsibilities Every public company MUST have a company secretary (usually one of officers or directors) Private companies not required to (the role of the company secretary may be done by one of the officers) COMPANY SECRETARY Lecturer: RowinGurusami

44. Common law increasingly recognises that they may act as agents to exercise apparent or ostensible authority They can enter into contracts connected with administrative side of company (Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd 1971) Secretary cannot extend contracts to commercial purposes (Re Maidstone Building Provisions 1971) and cannot borrow money on behalf of company (Re Cleadon Trust Ltd 1938) POWERS AND AUTHORITY Lecturer: RowinGurusami

45. Professional who performs an audit on the financial statements of a company, and who is independent of the entity being audited An audit is a check on the stewardship of directors Membership of a Recognised Supervisory Body is main prerequisite for eligibility as auditor (ICAEW, ICAS or ACCA) Audit firm may be either a body corporate, partnership or sole practitioner COMPANY AUDITOR Lecturer: RowinGurusami

46. Company is exempted from audit if: Turnover for that year is not more than £6,500,000 and balance sheet total is not more than £3.26 million (this does not apply to public companies, banking/insurance companies or those subject to statute-based regulatory regime) Company is non-commercial, non-profit making public sector body subject to audit by public sector auditor Dormant company Members holding 10% or more of capital of any company can veto the exception EXEMPTION FROM AUDIT Lecturer: RowinGurusami

47. Under s532, any agreement between auditor and company that seeks to indemnify auditor for their own negligence, default, or breach of duty of trust is void s534 allows agreements that seek to limitthe auditor’s liability to the company. Those agreements can only stand for one financial year and must be replaced annually. Must be approved by members and publicly disclosed in accounts or directors’ report Liability can only be limited to what is fair and reasonablehaving regards to auditor’s responsibilities, contractual obligations and professional standards AUDITORS’ LIABILITY Lecturer: RowinGurusami

48. Resolution can be proposed to: Remove auditors before term of office expires Change auditors when term of office is complete Auditors have the right to make representations of reasonable lengths to the company The company must: Notify members in the notice of meeting of representations Send a copy of representation in the notice If not sent out, auditors can require it is read at meeting Auditors removed before expiry of office can attend meeting at which office expires or meeting at which appointment of successors is discussed REMOVAL FROM OFFICE Lecturer: RowinGurusami